Your Business Deserves To Thrive

When a Corporation Fails To Exist (Legally) (Part III)

On Behalf of | Oct 20, 2016 | Business Management, Choice of Entity, Uncategorized

Corporation by Estoppel

In Cranson v. I.B.M. Corp., Cranson decided to invest in a corporation that was soon to be formed.[1] Upon being advised by the attorney that the corporation had been formed, Cranson received a stock certificate for his shares and was shown the corporate seal and minute book.  The company started conducting business, through corporate bank accounts, with auditors maintaining corporate books and records, and under a lease for the office space entered into by the corporation.  Cranson, too, started conducting corporate business, as president of the company, including ordering some typewriters from I.B.M.  Turns out the attorney did not file the certificate of incorporation, signed prior to May 1, 1961, until November 24, 1961.  Cranson and others at the company were not aware of this oversight.  During this time, the company purchased eight typewriters from I.B.M., partially on credit, leaving a balance due of $4,333.40.  I.B.M. sued Cranson, seeking to hold him personally liable for the corporate purchases.

On appeal, I.B.M. argued that the company’s failure to file its certificate of incorporation negated all corporate existence.  The court disagreed.  The court did not apply the doctrine of de facto corporation because, at the time of the transactions between the company and I.B.M., there was no attempt to incorporate (e.g., mailing the paperwork to the Secretary of State) on the part of the company’s attorney.  But the court also said that I.B.M., having dealt with the company as if it were a corporation and relied on its credit rather than that of Cranson, could not argue that the company was not incorporated at the time the transactions occurred.  The court cited an old Louisiana case that “it would generally be inequitable to permit the corporate existence of an association to be denied by persons who have represented it to be a corporation, or held it out as a corporation, or by any persons who have recognized it as a corporation by dealing with it as such.”  Accordingly, the court held that Cranson was not personally liable for the balance due on account of the typewriter purchases.

The doctrine of corporation by estoppel might seem a little strange in that it is less protective of third-party creditors who did everything right (compare this to the concept of partnership by estoppel, which we discussed here).  The rationale seems to be that both parties believed and acted as if there was a corporation, so it is only equitable to treat the situation as if there was one.

This post was the third part of a multi-post blog series on de facto corporation and corporation by estoppel.  In our next post, we will discuss a situation where the court found neither de facto corporation nor corporation by estoppel because of the absence of good faith.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

[1] See generally Cranson v. I.B.M. Corp., 234 Md. 477 (Ct. App. 1964).  Unless otherwise noted, all references to the case are to this citation.